the MID’s largest effect on homeowners is to influence their household financial decisions by encouraging them to increase indebtedness.

To give context to the comparison, Denmark’s tax system is divided into three income brackets. The Danish MID was reformed in the 1980s to significantly limit the deduction for those in the top bracket, slightly reduce it for the middle bracket and increase it for those in the bottom bracket, providing lower income homeowners more tax benefits. In the U.S., the MID is applied similarly to all income tiers (subject to income phase-outs).

However, even with Denmark’s more progressive MID, the study found the difference had no effect on the homeownership rate between the income groups.

Further, the true beneficiaries of the MID are home builders, lenders, real estate agents and mortgage brokers who profit from increased home prices — not homeowners.

Alternatively, the study found other types of tax policies do promote homeownership, such as providing low-income homebuyers with subsidized savings accounts for home purchases.

The MID’s severe shortcomings

In the U.S., the MID provides an itemized income tax deduction for interest paid on a mortgage that:

funds the purchase price or improvements for a primary or second residence; and

is secured by the owner’s primary or second home. [Internal Revenue Code §163(h)]

However, claiming the MID requires a homeowner’s total deductions and income to be high enough to benefit from itemizing — a tax filing method most often used by high-income homeowners with more assets and expenditures.

Thus, the size of the MID subsidy directly correlates to the amount of the mortgage, the home’s value and the owner’s supporting income. The wealthier the homeowner, the bigger the tax savings.

For some perspective, consider that only 12% of tax filers with an adjusted gross income (AGI) of less than $50,000 itemize their deductions and benefit from the MID, while 94% of those with an AGI of $200,000 do, according to the Internal Revenue Service (IRS) and U.S. Census Bureau.

In practice, this means the MID:

is claimed by a relatively small portion of homeowners — just 20%, according to the Urban Brookings Tax Policy Center; and

disproportionately benefits the top income earners.

So, the majority of homebuyers do not benefit from the MID at all. In fact, the purported “savings” afforded by the MID are actually paid up front through inflated home prices. This results in the MID primarily functioning as a tool to increase profits for:

builders through increased property prices;

lenders through larger mortgages; and

real estate brokers through increased broker’s fees.

Theoretically, the homeowner may recoup their losses over the course of several years by claiming the MID. However, as this is conditioned on having the income and financial wherewithal to itemize — and knowing most do not claim the MID — the chances of the homeowner using the MID for this purpose are slim.

It is true, then, that many do benefit from the MID. However, it is not the homebuyer — the very participant the MID is intended to serve.

The future of the MID

While discussion surrounding the current administration’s proposed tax reform plan involves the negotiation of many itemized deductions, the MID has been identified as one that will be preserved.

The choice to maintain the MID is to be expected: it has long been passionately supported by many, making its repeal a near impossible feat.

What is more politically probable and necessary is a reform of the MID to redirect benefits from the wealthy to mid- and low-income homeowners — the intended beneficiaries. For example, the MID’s maximum deduction amount could be reduced to an amount closer to the average priced home for the homeowner’s area. Or, homeowners may be permitted a standard tax credit for homeownership not tied to their mortgage amount.

Yet, no change of any sort appears to be in sight. Until the MID is amended, expect low- and mid-income homebuyers to continue losing out on these tax benefits, while home prices remain bloated and other participants in the industry profit.

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4 Comments

William Matz
on October 11, 2017 at 12:55 pm

There is a simple fix. Move from an interest deduction to a credit. The % would be set to make the change revenue neutral. That would allow lower income owners to take the credit and the std deduction.

Terry, the point is what statics bear out that directly correlate to the U.S. Our tax code allows MID up to $1M including a “vacation” home. Clearly the rich benefit. The suggested deductions are fair and reasonable to off-set maintenance and the cost of ownership. 65% of Americans own their house free and clear. Save and pay down the mortgage. Don’t have kids.

Your figures are completely whack on the percentage of Americans with no mortgage on their home. More in the 30% range and a large % are retired Senior owners—Yes Millionaires and landlords benefit, however every time they pay more taxes its passed through to the consumer. The 99%ers. No MID and rents will goes up. And no MID, it will make it much more difficult to get close to that 1/2 Million dollar mark that it takes to retire comfortably.

Who cares what Denmark does –In the states the average working Joe knows he needs to help get the Gov off his ass and out of his wallet. One of the best ways is to take the Mortgage tax deduction instead of giving his money to the Tax man and Landlord. What he does with the savings is his business but usually its a case of, baby need shoes ,kids need lunch money and car needs Gas. To hell with paying for Jerry’s Choo Choo train and Donald’s wall.